Netflix, Inc. (NASDAQ:NFLX) shares soared after the streaming content provider’s earnings report last week. And while Netflix stock now looks stretched by most near-term measures, the powerful post-earnings rally has pushed NFLX into its next upside leg — one that might have months to go.
Specifically, Netflix reported a quarterly profit of $23.7 million in the first quarter, which was down from $53.1 million in the same period one year ago. The top line, however, climbed to $1.57 billion, up from $1.27 billion, while NFLX continues its international expansion quest.
As for most growth companies, analysts and investors seemed to once again be focused on Netflix’s subscriber numbers; the company added a better-than-expected 4.9 million users, 2.3 million of which are in the U.S.
Bears on Netflix stock argue that the international expansion so far is a losing business while the bulls purely look at the top line growth metrics. I’ll stick to the charts.
Netflix Stock Charts
Looking at the bigger picture of NFLX stock through a multiyear weekly lens, we see that after the stock broke to new highs in autumn 2013, Netflix continued the ascent for another six months before settling into a choppier consolidation period for the rest of 2014. However, the consolidation phase held above the previous highs (lower black line) in textbook fashion and ultimately with last week’s move broke out of this sideways channel in a violent manner.
While the breakout move is bullish through this longer-term lens, just like the previous breakout in 2013, a pause is at least in order (if not a full retest of the breakout area near $480) before tactical traders and investors will have better odds in Netflix stock.
On the daily chart below, we see that the three major rallies since April 2014 have measured as follows:
- April 2014-July 2014: 60% in 45 days
- January 2015-February 2015: 51% in 30 days
- April 2015-present: 40% in 9 days.
It doesn’t take a mathematician to see that the rally over the past nine days has an extreme steepness to it, which from a risk/reward perspective in the near-term doesn’t add up to anything attractive on the long side. Near-term momentum in a name like NFLX can be severe, and after rallying steeply into last week’s earnings report, then rallying 18% last Thursday on the back of the report, Netflix stock tacked on another 1.69% last Friday while the broader market was down on a global selloff.
There is no great reason to fight this rally, but chasing it higher at these levels and on this steep slope is not good risk management.
The better way to approach the stock from here is to wait for a consolidation period, which could be as little as a few days), then buy Netflix stock on the next bullish reversal day. Once that happens, the next logical upside target becomes the $600 area for NFLX.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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